Following the completion of the latest interest rate increase by the Bank of Japan, Deputy Governor Shinichi Uchida has clearly indicated that the monetary policy tightening cycle is not yet over. The central bank will continue to base the timing and pace of any further rate hikes on economic conditions and price developments.
Speaking at a post-meeting press conference on Tuesday, Uchida stated that despite the recent hike, overall financial conditions remain accommodative, and the policy interest rate continues to support the economy. He emphasized that it is "crucial" to anchor inflation around 2%, noting that current price trends are gradually approaching that target. Officials must be vigilant about the upside risk of underlying inflation exceeding the target.
These remarks signal that the Bank of Japan's window for raising interest rates remains open. Uchida also pointed out that a virtuous cycle of wage and price increases is forming, which is a positive sign for the economy. However, uncertainties stemming from the Middle East situation and the pass-through effects of exchange rate fluctuations on inflation will be key variables influencing the future pace of policy decisions, requiring close market monitoring of these evolving risks.
It is worth noting that Bank of Japan Governor Kazuo Ueda was absent from the interest rate decision meeting for the first time due to illness, with the Deputy Governor stepping in.
Key Points from Deputy Governor Shinichi Uchida's Press Conference
1. Future Interest Rate Path
The Bank of Japan will continue to decide whether to raise interest rates further based on economic and price conditions. The pace of future hikes will take into account the situation in the Middle East. Long-term interest rates will be determined by the market.
2. Inflation Outlook
Anchoring inflation around 2% is crucial. Price trends are gradually rising towards 2%. There is a need to be mindful of the risk that underlying inflation could exceed 2%.
3. Economic Assessment
The Japanese economy is in a moderate recovery, and downside risks have diminished. Even after Tuesday's rate hike, financial conditions remain accommodative, and the policy rate continues to support the economy.
4. Government Bond Purchase Program
Under the current bond program, the Bank of Japan's balance sheet will continue to shrink. There may be future adjustments to the pace of Japanese government bond purchases.
5. Governor Kazuo Ueda's Absence
Governor Ueda's absence will not have a significant impact, and his hospital treatment is expected to be short-term.
Policy Remains Accommodative Post-Hike, Path Forward Data-Dependent
Uchida stated that the Japanese economy is in a moderate recovery, with downside economic risks having decreased compared to before. Price movements may even exceed the central bank's 2% policy target. He emphasized that even after this rate hike, current financial conditions remain accommodative, and the policy interest rate continues to support economic activity.
He said the Bank of Japan will continue to assess the likelihood of achieving its economic outlook and will determine the pace of rate hikes by comprehensively considering various risks. Regarding long-term interest rates, Uchida stated they will be determined by the market. If yields experience a sharp spike, the central bank will flexibly increase bond purchases to stabilize the market.
Inflation Upside Risks Increase, Wage-Price Cycle Established
On inflation, Uchida sent a relatively hawkish signal. He noted that price trends are gradually rising towards 2%, and the simultaneous increase in wages and prices has become an established trend, providing positive support for the economy.
He stressed that policymakers need to pay close attention to upside inflation risks, particularly the possibility of the underlying inflation rate exceeding 2%. Stabilizing inflation expectations around 2% is a core objective of the current policy framework.
Uchida also noted that estimates of the neutral interest rate are difficult to apply directly in practice, and decisions will be made by comprehensively considering actual performance in both the economy and prices.
Foreign Exchange and Geopolitics as External Constraints on Hike Pace
Uchida identified exchange rates as an important factor affecting the economy and inflation.
He stated that while the exchange rate itself is not a direct target of monetary policy, the Bank of Japan will closely monitor its pass-through effects on inflation. He pointed out that current exchange rate movements are more likely to be transmitted to the price level, a trend that warrants ongoing attention.
On the geopolitical front, Uchida said the U.S.-Iran agreement is a positive development, but uncertainties stemming from the Middle East situation have not dissipated. The potential impact of related conflicts will be factored into considerations for the pace of tightening.
He indicated that when assessing the pace of interest rate hikes, the situation in the Middle East will be one of the external risk factors requiring continuous observation.
Adjustments to Bond Purchase Pace Not Ruled Out
Uchida stated that the central bank will continue to proceed with balance sheet reduction and has not ruled out the possibility of adjusting the pace of government bond purchases in the future. Meanwhile, the existing plan for ETF sales will be maintained.
He noted that bond market functioning is improving, and the central bank's balance sheet will continue to shrink under the current bond program framework. He also indicated that the pace of Japanese government bond purchases may be adjusted in the future, but no decision has been made yet on the duration of a new bond program.
On the closely watched issue of ETF disposal, Uchida was clear—there is no consideration at this stage to change the pace of sales. This means the Bank of Japan will continue to gradually reduce its massive holdings of stock ETF assets according to the existing schedule.
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